There has been a discussion circulating around Washington for a number of years about the value of establishing a simplified Defined Contribution retirement system commonly referred to as "401(x)". This program would create a single defined contribution program with a single set of rules to replace the "alphabet soup" of DC plans currently in existence.
Many product vendors have championed this cause, particularly through organizations like the Investment Company Institute, the mutual fund companies’ trade group. Even the U.S. Chamber of Commerce’s chimed in with support in a policy report in 2007. It is an attractive notion. The claim is that the system is far too complex for employers, and that going to a single, simplified program would work to everyone’s benefit.
I have always viewed this as a dubious claim. "401(x)" seems to be a program that is more centered on the self-interests of a handful of vendors for which such a program would save much expense; it is not one which is designed to benefit employers. While it is true that ASPPA and Metlife count no less than 17 types of DC plans (see the Metlife’s excellent chart , which was also published by ASPPA in its latest Journal), and I could probably add a few more, it is also true that these programs did not arise in a vacuum. We have a complex, sophisticated employer base in the United States. It stands to reason that an effective retirement program cannot be based on a "one size fits all" concept. Does it make sense that a small, 5 employee charity has the same design as a publicly traded company with 150,000 employees? I think not. Does it make sense that a start-up sole proprietorship has the same program as a large international company that is over 100 years old? I think not.
These 17 plans are there for a reason: both the marketplace and valid policy concerns have insisted that they be there. Each of the plans have a particular purpose, a particular market whose purposes they serve. Trying to force it otherwise will be disruptive to those same forces which enabled those program in the first place. I do not doubt that these programs may need a bit of tweaking, but the fundamental concept remains: they were each created in response to a (at least perceived) specific policy concern and need of the marketplace.
The classic example of the potential disruption which can be caused by a "401(x)" approach is found in the implementation of the new set of 403(b) regs. 403(b) plans were designed as individual pensions for employers that could ill-afford highly complex retirement plans. They have worked well for over 50 years. But since the IRS has taken upon itself the view that these should be treated like 401(k) plans, it wrote a set of regs which actually acts as a sort of "backdoor 401(x)." While I understand and support the notion that the serious non-compliance the IRS found needed to be addressed, the chosen approach to enforcing compliance is creating awful results. The transition costs have been unexpectedly high for the retirement industry (including many vendors which had originally supported 401(x)) and has created a growing anger and frustration in the bar and in the 403(b) plan sponsor community. The new rules attempt to force a well designed individual pension program into an employer program that large parts of the market are ill-equipped to handle. We will likely see, as the year progresses, a regulatory and enforcement nightmare.
It is this nightmare, I believe, that exposes the serious shortcomings of the concept of "401(x)." It doesn’t serve marketplace needs; there is no significant policy it serves; and it has large, hidden transition costs. The New York Times noted the lack of political will to do a single simplified program in its recent article discussing Workplace Pensions. The Workplace Pension program sits on top of the current system, addresses a serious policy need and marketplace need, and does not attempt to replace the current system with thoughtless uniformity. It is a lesson which I hope policymakers remember as they discuss the revamping of the current system, one which should dissipate any notion of a "401(x)."